The “mini budget” announced on the 23rd September 2022 revealed the then chancellors plan for growth; a wave of tax cuts which included:
Reversal of the temporary increase in NICs
Cancellation of the health & social care levy
A cut in the basic rate of income tax
Abolishing the 45% additional rate of tax
Cancellation of the proposed increase in the Corporation tax rate from April 2023
Extension of the AIA limit of £1m for companies
Enterprise investment zones
Cuts in Stamp Duty Land tax
To say this created some turbulence in the economy is probably an understatement, but what affect has this had on pension schemes?
The value of the pound fell, whilst Government bond prices collapsed, and yields soared causing the Bank of England to step in. Without their intervention the Bank of England reported to MPs that defined benefit pension fund investments in some pooled liability-driven investment funds would have been rendered worthless!
Pensions Aspect reported remarks from Sir John Cunliffe at the Bank of England:
“The speed and scale of gilt yield movements in the period leading up to the BoE’s announcement was unprecedented, Cunliffe claimed. The biggest daily increase before the recent turmoil had been a 29bp rise in 2000, while the end of September saw two daily increases in 30-year gilt yields exceeding 35bp”
The surge in yields triggered a collapse in the net asset value of LDI funds and a significant increase in their leverage, Cunliffe told MPs.”
Most well-run schemes have managed this by hedging the interest rate and inflation sensitivity in the scheme’s liabilities, to do this they have met the collateral calls. Which have decreased assets but similarly decreased liabilities.
The concern is if the gilt yields continue to rise, and schemes run out of collateral to support the LDI Hedge.
The reversal of of some of the tax cuts on the 14th of October and the complete reversal on the 17th October of any cuts that had not been substantially enacted was helpful but the position is fluid with a change in prime minister now expected too!
The announcement this week that the CPI rate had rose to 10.1% to September 2022 is concerning and particularly relevant to DB schemes who commonly use the September rate for members benefit and deferred pension revaluations.
Many pensioner increases are capped at a maximum of 5%, given the backdrop of relatively subdued inflation rates in recent years generally increases have been below this.
Rising inflation will have a knock-on effect on pension liabilities and Trustees should assess the risk of their scheme by speaking to Actuaries.
The employer covenant needs to be continually assessed too, and most schemes have a well-versed integrated risk management process to monitor this.
These are turbulent times, that even a well governed scheme will find challenging. Expect increased questions from your auditors on post balance sheet investment values, the employer covenant and the scheme’s funding position.
If you have any questions or concerns on how this might impact your scheme financial statements please speak to one our Pensions team.